Business, 08.11.2019 03:31 bankskry

Approximating the price of long-term bonds the present value of an infinite stream of dollar payments of $z (that starts next year) is $z/i when the nominal interest rate, i, is constant. this formula gives the price of a consol—a bond paying a fixed nominal payment each year, forever. it is also a good approximation for the present discounted value of a stream of constant payments over long but not infinite periods, as long as i is constant. let’s examine how close the approximation is.

a. suppose that i = 10%. let $z = 100. what is the present value of the consol?

b. if i = 10%, what is the expected present discounted value of a bond that pays $z over the next 10 years? 20 years? 30 years? 60 years? (hint: use the formula from the chapter but remember to adjust for the first payment.)

c. repeat the calculations in (a) and (b) for i = 2% and i = 5%.

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Approximating the price of long-term bonds the present value of an infinite stream of dollar payment...

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